Stockton, an inland port in California's Central Valley, is saddled with $900 million in pension obligations to city workers. / Justin Sullivan, Getty Images

by Michael Winter, USA TODAY

by Michael Winter, USA TODAY

A federal judge Monday agreed that Stockton, Calif., is broke and can pursue bankruptcy, making it the largest U.S. city to reorganize its wrecked finances under court protection.

After a three-day hearing, Bankruptcy Judge Christopher Klein rejected creditors' claims that the Central Valley city of 291,000 residents did not negotiate in good faith to resolve its debt troubles. On the contrary, Klein ruled that it was the major Wall Street bondholders who had refused to negotiate unless city officials slashed the $900 million owed to the California Public Employees' Retirement System.

Bankruptcy means creditors can expect to receive a fraction of the $165 million in loans they guaranteed in 2007 so Stockton could pay its pension obligations.

Stockton filed for Chapter 9 protection last June, blaming its woes on years of mismanagement and generous pay, benefits and pensions for city workers. The housing collapse and recession hit the inland seaport especially hard, and property tax revenues plummeted as foreclosures soared.

City officials slashed the police force 25% and cut staffing and city services.

"It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law," Klein said.

In a sobering courtroom analysis, Klein chronicled Stockton's historic slide towards bankruptcy as Stockton, over betting on sustained tax revenues from a real estate boom, bankrolled a downtown redevelopment and doled out generous employee benefits on top of a "multi-decade, largely invisible pattern of above-market compensation for public employees."

One example is heath care benefits, which the Associated Press notes provide lifelong coverage for all city retirees and a dependent, regardless of how long they worked.